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International Column
 
BEST OF B&E 2011 "IMPACT INVESTING AND ITS POTENTIAL"
Creating an impact that achieves goals of equity as well as economic growth

Issue Date - 19/01/2012
 
As a new field of investing, impact investing uniquely gives the best of two worlds to the investor – financial returns as well as social equity. Linda L. Darragh, Director of Entrepreneurship Programs & Clinical Associate Professor of Entrepreneurship and Nurkholisoh Aman (Research Assistant) of the Booth School of Business analyse the developments and stumbling blocks for impact investing in India



Impact investing is an emerging investment field that is gaining increasing popularity as people look for ways to grow sustainable businesses. The recent global financial crisis is often cited as an example of how the capitalist model has failed to generate equitable and sustainable economic growth. On the other hand, philantropic activities alone cannot provide long-term solutions to what are the world’s most pressing challenges such as poverty, renewable energy, and the lack of basic health care.

Impact investing occupies a unique position between the extremes of pure for-profit businesses and charity/grantmaking. Through the promise of getting the “best of the two worlds”, impact investing presents a new alternative in the world of investing. In a 2010 study, JP Morgan defined impact investment as “investment intended to create a positive impact beyond financial return.”

Generally, impact investments target the population at “the base of the pyramid” (BoP). They aim to improve the lives of the poor by providing products or services that are otherwise unavailable or unaffordable. Another point of view of impact investments places the focus on respecting the environmental impact of business activities.

At Chicago Booth, we recently conducted a study to understand the landscape of impact investment in six emerging economies. In India, we found that there is an increasing interest in investing in entrepreneurs who pursue both social and financial objectives. A few years ago, micro finance lenders represented the breadth of social entrepreneurs in India. Now, impact investors have significantly broadened their definition of social investing due to the emergence of potentially scalable ideas in other sectors.

Given the sheer size of the Indian population at the base of the pyramid, there are almost unlimited opportunities for impact investing. Additionally, India now faces big challenges to protect its fragile environment – air, water, forests, and bio-diversity – from the rising pressures created by economic success.

Interviews with impact investors and agencies that work with social ventures identified the sectors that are most popular amongst social entrepreneurs in India. These are:
A. Water & Sanitation – There is a huge need for companies that offer customers safe, affordable drinking water through community water systems. Approximately 170 million people in India currently lack access to safe, clean drinking water. Water-borne diseases are estimated to cost US$600 million annually in lost production & medical treatment.

 
B. Renewable Energy – According to the Acumen Fund, 579 million people in India lack access to electricity. Even though a village is considered electrified if only 10% of its households have access to electricity, national electrification rates are still low.

C. Agriculture – There is plenty of room to improve productivity and increase efficiency in the agriculture sector. Intellecap research estimates that 30% of Indian fresh farm produce becomes spoilt due to a lack of logistical support.

D. Health Care – Opportunities exist to reduce costs and increase access to quality preventive and curative healthcare facilities, especially in tier-2 and tier-3 towns and rural areas. According to the Acumen Fund, only 43% of Indian women are cared for by a skilled attendant during birth, and more than 100,000 women die every year from pregnancy-related issues.

E. Financial Inclusion – While micro lending has long been known in India, there are still huge opportunities to serve around 100 million people who currently do not have any access to banking services.

We also identified the following issues in India’s entrepreneurial ecosystem:
Lack of Debt Funding – There appears to be a significant lack of debt support for early-stage entrepreneurs in India. To obtain bank loans, one has to put down personal guarantees, which often becomes a key hurdle for aspiring entrepreneurs.

Lack of Impact Investment Funds – Although there is a demand for more impact investment funds, India has led many nations in the development of successful funds that are ready to commit “patient capital” on risky projects in the early stages of growth. Some of these impact investment funds include Aavishkar, SONG Investors, Acumen Fund, LOK Capital and soon Ennovent and Intellicap I^3-N Fund.

Risk-Averse Culture – Indian society tends to be more risk averse, and parents are generally not supportive of their children rejecting “safe jobs” to start their ventures, unless it is a family business.

Lack of Entrepreneurial Skills – Interviewees felt that the current university curriculum did not impart sufficient skills needed to start a business. The National Entrepreneurship Network (NEN) is tackling this issue by providing critical support to start-ups and early-stage entrepreneurs through high-impact entrepreneurship education, access to mentors & experts, fast-track access to incubation, funding, and learning tools & materials.

Lack of Support for Impact Ventures – The lack of entrepreneurial skills is even more profound for social ventures, which often entail greater challenges. Dasra Social-Impact is a professional development program that provides the social entrepreneur an international network of advisors, mentors and other social entrepreneurs to help build the skills required to operate their organisations at scale.

Regulatory and Policy Issues – There seems to be a general lack of awareness of government funding available to entrepreneurs, and the schemes and wordings are often unclear.

As identified above, although India still faces major challenges in solving societal and environmental issues, there is significant activity in India around impact investment that can mobilise capital to tackle these issues. Certainly, India is becoming an R&D lab in social ventures and impact investment that other nations can replicate.

Anirudh Raheja           

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